The ISM November manufacturing index came in close to expectations, and at 58.7, suggests that the manufacturing sector is still quite healthy. As the chart above also suggests, the ISM index points to GDP growth in the fourth quarter of at least as much (3.9%) as we saw in the third quarter. At the very least we can say there are no signs of any slowdown. At best, fourth quarter growth may surprise on the upside, and that would equate to a modest acceleration of growth from the levels (2.3%) we have seen during the current recovery to date.
Meanwhile, markets seem overly obsessed with the possibility that plunging oil prices could tip the Eurozone into deflation and pose problems for oil producing countries that could have negative ripple effects throughout the global economy. Deflation is not a dangerous condition: just ask any consumer how good it feels to have his or her hard-earned dollars buy more. If lower energy prices do create some modest deflation, it will not be the fault of the Fed, it will be the happy result of an abundance of cheap oil. For every oil producer harmed by lower oil prices there are millions of consumers that benefit. The oil and mining sectors have been a real powerhouse driver of U.S. growth in recent years, but it is likely the case that the growth baton will be passed to other sectors in the coming year. What we are living through now is a growth rotation, not the beginnings of another decline.